Lessons from New England
Bank Failures

The rapid deterioration in the condition of New England
banks during the late 1980s, following a period of robust
growth and prosperity in the region, provides valuable
lessons relevant to efforts to protect the banking system
from future shocks. This article demonstrates the timing
of events leading to the failure of 87 New England banks.
It emphasizes the development of abnormal risk concentrations,
an eventual change in the economic and psychological
underpinnings of these risks, and the rapid transition
from apparently healthy banks to failure.

The author finds that most bankers ceased aggressive
risk-taking at the first sign of emerging credit problems,
and that bank supervisors generally reacted promptly
as credit weaknesses emerged but did not act against
the earlier risk concentrations. Furthermore, capital
ratios did not deteriorate until some time after credit
problems emerged.